Monday, May 25, 2009

Historical data supporting a resumption of the bear market

I know that there are a lot of people who are bears and yet believe March 9th was "The" intermediate-term bottom. I also know there are perma-bulls who still think it was the end of the bear market altogether. The latter I won't even trifle with, as perma-bulls and me just ain't gonna see eye to eye right now. The stock market bulls were always right in the 1980s and 1990s and now they are always wrong - such are long-term market cycles. It is indisputable that we are in a secular bear market IMO and I would rather focus on the intermediate-term swings from the bear perspective than argue with wounded perma-bulls.

When markets are collapsing quickly in the throes of a wicked bear market, it is rare for them to rise significantly above the 200 day moving average (or 50 week moving average) for more than a few weeks. A touch of such moving averages is usually enough to provide resistance and resume the downward trend. This generally occurs in severe cyclical bear markets until the bear market is over. Sure, there are a few exceptions, but this has worked out well in past brutal bear markets.

Additionally, "important" bear markets in equities usually last 2.5-3.5 years or so. Below, I show some examples that I think are relevant, as I do believe this is a bear market that will take a prominent place in history. Those not convinced this is the case need to review the fundamentals IMO and recognize that this is the beginning of a secular credit contraction (the last one began in 1929-1930).

The current bear market began in mid-October, 2007 and is therefore only 1.5 years old. It is too early to be calling for a huge rally. To me, this would essentially be the equivalent of calling for a cyclical bull market as it would require a significantly rising 200 day moving average and this is very unusual in a strong bear market.

I don't think there's a snowball's chance in hell that this cyclical bear market is over. It must be remembered that we need to wipe out decades excessive optimism to restore balance and sanity to the stock markets. Because the 1970s were the inflationary zig-zag sort of secular bear market in nominal terms, this one should be a deflationary downward spiral like the 1930s.

Below are examples of daily charts of what I think are relevant bear markets with the 50 and 200 day moving averages drawn in for illustrative purposes. The first is the 1930s bear market and starts with early 1930 (chart "stolen" from - a great site for historical chart data):

Next is the NASDAQ bear market from 2000-2003:

Finally, the blow-out of the Japanese miracle market in 1990, which is still mired deep in secular bear territory after 18-19 years:

So I guess one of my keys is time. Previous relevant historical examples take at least 2.5 years before a significant counter-trend rally can occur, because nasty bear markets take that long to express themselves fully. Only then can a "big bounce" that goes far beyond the 200 day moving average occur, which is essentially saying that a cyclical bull run within this secular bear market is still a long ways off. Right now, of course, it doesn't really matter for traders, as most bearish traders are positioning/positioned for a downward move here. However, a bounce that occurs 100 S&P points lower will be interpreted by some as a signal to go intermediate-term long while I'll be staying intermediate-term short as I'm not looking for another leg higher in this bear market rally and I think it's over.

Elliott wavers get overly technical sometimes in my opinion - I am a novice EW follower and think it can be one of many useful tools in analyzing markets. Because I understand the fundamentals and know that it is too soon to even start talking about the economy, banks or housing bottoming, and too soon to start talking about unemployment bottoming, I would never let a single technical method in a vacuum give me my "big picture" trading ideas. Remember, Prechter and other Elliott Wave practitioners are often wrong and then just change their wave counts as we all have to change our views when the markets move against us. Without worrying too much about the little individual squiggles on the longer-term charts, I think the action since the fall crash lows has been very corrective-looking in almost all the indices I follow.

We'll find out soon enough...

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